Next week’s spotlight falls on the USD and the RMB complex.

Well, that was dramatic, but some significant levels on equity markets held on a closing basis, while the DXY rallied into the close. But in the end, it was all about cleaning the slate while living to fight another day.

Next week spotlight falls on the USD and the RMB complex, and following the likely publishing of the much talked about US Treasury FX report, it’s going to be another packed week on the economic front for these currencies.

China a Currency Manipulator: Yes or No

With the odds at 50-50 chance that the US will go so far as to outright name China a “manipulator.”, For no other reason than the usual chorus of mixed signals from the US administration, with the worrywarts leading the way. White House Economic Advisor Kudlow opined on CNBC that China’s response to US requests is “unsatisfactory.” In contrast, Treasury Secretary Mnuchin said he’d had a “very productive” conversation with the PBoC but expressed his concerns about “the weakness in the currency.”

It all suggested that, while siding with no currency manipulator camp, the uncertainty around the report warranted at minimum a passive reduction in specific currency exposure, especially when risk off lead  to unwinds last week  of critical consensus short positions where  the “funders” tended to outperform And at maximum, cleaning the slate entirely including trimming AUD shorts and USDCNH longs.

Last week the EUR, JPY and CHF all went bid against the USD as equities took a plunge and the rally accelerated when Trump reminded everyone that no one is safe from the wrath of Trump, even his nominated Fed Chairman Jay Powell.

Europe Risk

In Europe, there will be more political intrigue. Italy will present it budget draft to the EU, keeping in mind the EU Commission already said last week in a letter to the Italian government that its latest fiscal plans point to “a significant deviation” from the path recommended for Italy by the EU Council. And headline risk is massive as the UK and EU are due to discuss Brexit at the EU Summit. But flying under the radar is the first major electoral test for Merkle’s government – this vote is in Bavaria. on Sunday

Oil Market 

Headwinds remain.

The S &P stabilised well and continued to roll with the punches, but Oil markets were not so eager to snap back. Oil prices were struggling to follow the equity market lead, after the International Energy Agency monthly Market Report adjusted demand lower by 110,000 bpd for both 2018 and 2019, reported an increase of 100,000 bpd in September OPEC production while pointing out OECD data suggests oil stocks are at the highest level since February. As well as advising that oil markets are adequately supplied,  which again highlights uncertainty over supply once the US sanctions on Iran take effect. Lordy Lordy, it’s a noisy market.

Reuters

Drillers added eight oil rigs in the week to Oct. 12 according to Baker Hughes. This is ahead of the Plains All American Pipeline Project which is set to start flowing on Nov 1 and should ease pipeline bottlenecks that have lower crude prices in the Permian Basin. The Sunrise Pipeline has a reported capacity of about 500,000 barrels per day.

Gold Markets

The current landscape remains exceptionally shaky if both stocks and US rates markets continue to recover significantly in the days ahead. As well there a plethora of tier one US economic data out next week, and given strength in the recent run of US economic data it has anchored the USD to fundamentals where the dollar has shown a tendency to appreciate. Without a significant break of the critical $1225 level its far to early to jump on the bullish gold bandwagon.

China Trade Data

Speaking of China data, I’m still perplexed why markets analysts were so enamoured about Beijing’s export data. Sure, it was surprisingly hardy versus market expectation, but it was impossible to factor in with any high degree accuracy, the front-loading impact, which was more than evident to the local S traders who were buying the USDCNH on the dip. Local’s tend to focus on electrical machinery exports component which is Chinas biggest export to the USA, and given the surge in that sector, the data was not all that significant as exporters were fulfilling longer-term commitment before implementation of the latest tariffs on US$200 billion in Chinese good. Even the so-called ‘ hoarding effect” on the commodity imports components was evident given the markets had expected some form of trade tariff escalation in mid-September and impacted the data.

@SteveonTwitter

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Stephen Innes

Stephen Innes

Head of Trading APAC at OANDA
Stephen has over 25 years of experience in the financial markets and currently based in Singapore as the Head of Trading Asia Pacific with OANDA. Stephen's market views focus on the movement of G-10 and ASEAN Currencies. His views appear in Bloomberg, CNBC.Reuters, New York Times WSJ and the Economist. His media appearances include Bloomberg TV & Radio, BBC International, Sky TV, Channel News Asia, ASTRO AWANI and BFM Malaysia. Stephen has an extensive trading experience in Spot and Forward FX, Currency and Interest Rate Futures, Money Market Derivatives and Precious Metals. Before joining OANDA, he worked with organisations like Nat West, Chemical Bank, Garvin Guy Butler, and Sumitomo Mitsui Banking Corporation. Stephen was born in Glasgow, Scotland, and holds a Degree in Economics from the University of Western Ontario.
Stephen Innes
Stephen Innes

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